RISK ASSESSMENT

A worrying security situation in a more uncertain political environment

The Taliban made a push across Afghanistan in 2018, carrying out deadly attacks throughout the country. The offensive on the capital of Ghazi province, which is home to a largely Hazara population (Shia minority), was repelled by government forces and their American allies in August, but Taliban forces still managed to seize part of the province. Control of this region is a key challenge for the Taliban, as controlling a non-Sunni region would prove their credentials as a political force that is capable of governing. Ghazi is also strategically located on the main road linking Kabul to the Taliban-run southern provinces, including Kandahar. The offensive reflects the weak position of the Kabul government, which in reality controls only 30% to 50% of the country. The Taliban has so far refused to negotiate directly with the government, but progress could be made through Russian diplomatic efforts. While the Taliban had agreed to sit at the negotiating table with the United States, the recent announcement by Donald Trump to pull about half of the 14,000 US troop in the country is likely to trigger domestic political realignments and further destabilise the country. The presence of the Islamic State is also becoming more visible, with deadly attacks targeting Shia localities and neighbourhoods in particular. The parliamentary elections in October 2018 saw a further upsurge in violence, with several hundred people killed and wounded according to a UN report. As the national results are yet to be announced, the lower house of parliament is likely to be particularly fragmented given the high number of independent candidates. The presidential elections scheduled for April will be the main challenge in 2019, increasing the uncertainty in this difficult security environment. Delays related to vote counting for the 2018 parliamentary elections could lead to a postponement of the elections for a few months, allowing for the emergence of new challengers to President Ashraf Ghani who stands for re-election. While the candidacy of Abdullah Abdullah, the Chief Executive under the government agreement in place since 2014, is still uncertain, former security adviser, Mohammad Hanif Atmar, has already announced his participation. Relations with Pakistan will remain strained, as the Kabul government accuses its neighbour of supporting the Taliban insurgency.

A persistently fragile agricultural economy

Growth is expected to remain weak in 2019, constrained by the difficult security situation. The effects of the severe drought that hit the country in the second half of 2018 are expected to start easing. However, the lack of seeds for future harvests may well have long-term consequences for the agricultural sector, which employs more than 80% of the workforce. With 2.2 million people affected, poor weather conditions displaced more people in 2018 than the conflict with the Taliban. Opium cultivation is expected to continue to fuel the illegal economy and is present in 30-50% of villages depending on the region (up to 85% in the southern provinces). Industry and services are also expected to grow moderately pending a mining sector development strategy, again constrained by the lack of infrastructure and the security situation. Private consumption will remain highly dependent on remittance flows from emigrants. Inflation is expected to rise as food prices increase due to adverse weather conditions. Political uncertainties and the security issue will all weigh on investor confidence, limiting the flow of private capital into the country.

Total dependence on international aid to finance twin deficits

With 51% of the state's revenue coming from grants, the balance of public finances is largely dependent on international aid, without which the government deficit would exceed 10% of GDP. As part of an IMF Extended Credit Facility, the government has been undertaking reforms to improve tax revenue collection since 2016. However, worsening security problems in connection with the upcoming elections is likely to dampen the extent of these efforts. As part of the partnership with the IMF, the government is also expected to boost its investment, particularly in the development of health and education infrastructure. However, the proportion of budget expenditures earmarked for civil servant salaries (48% in 2017) will squeeze the resources available for these investments, which will still be mainly covered by international donors.

The trade balance will remain largely negative (at 30% of GDP) in view of the country's low exports. This deficit will be financed by international donations. International assistance will also continue to support the country's foreign exchange reserves, which amounted to ten months of imports in mid-2018.